Fannie Mae and Freddie Mac's Affordable Housing Hang-Up

Fannie MaeandFreddie Mac asked this week for cash infusions from the federal government at a time when they’re already in the crosshairs of Congress.

Lawmakers and industry professionals have long argued that government-sponsored enterprises (GSEs) play an outsized role in the residential mortgage market. The GSEs’ large footprint in buying mortgages, bundling them, and guaranteeing the resulting mortgage-backed securities raises concerns about the amount of risk for which taxpayers are on the hook when the market experiences leaner times.

While lawmakers on both sides of the aisle express desires to reform the current arrangement, wide gaps remain. A major point of disagreement involves proposed changes to affordable housing goals, possibly replacing them with a fee-based program. Disparities there could torpedo a major legislative overhaul.

Affordable Housing as a Sticking Point

Although affordable housing goals are a relatively small part of the GSEs’ mandate, they are a huge point of political conflict – so we put real numbers to ideas often discussed in abstract percentages (here are county-by-county breakdowns). We found the current goals have much more potential to be impactful in less expensive, rural communities than in costly markets like New York City, San Francisco, or Los Angeles.

“Affordable housing” in the context of GSEs can refer to a few programs that assist low-income or underserved groups, like theHousing Trust FundandDuty to Serveobligations. At the heart of the debate, however, are the affordable housing goals: Each year a percentage of the loans purchased by Fannie and Freddie must come from low-income households, very low-income households, or households in low-income areas. There are similar goals for refinancing and multifamily mortgages. The GSEs are deemed successful if they either exceed the benchmark goal set for them or purchase a higher share of low-income mortgages than the share represented in the market overall.

In 2018, 24 percent of mortgages purchased by the GSEs must come from low-income borrowers, those earning less than 80 percent of the median income for the metro. Six percent must come from very low-income borrowers who earn half the median income, and 15 percent must come from low-income neighborhoods or from borrowers in neighborhoods[i]with at least 30 percent nonwhite residents.

It’s easy to get lost in all these percentages, so let’s put some numbers behind them, focusing on the largest category, loans to low-income borrowers.

Rural and Heartland Communities Could See the Biggest Change

High-cost coastal cities don’t have many homes that are affordable enough to meet Fannie and Freddie’s low-income thresholds, so low-income buyers in these areas have fewer opportunities to be impacted by GSE affordable housing goals. In fact, rural and heartland communities are likely affected the most by affordable housing goals and could see the biggest impacts if the goals are eliminated in any reform legislation.

In Los Angeles County, the 80 percent of median income threshold used by the GSEs is an annual income of a bit over $51,000. In the rosiest circumstances, for a conventional loan to bepurchasedby the GSEs, low-income borrowers with good credit would likely need to put down at least 5 percent and spend no more than 36 percent of their income each month on the debt payments. The average rate quoted for a 30-year fixed-rate mortgage in January for borrowers with low down payments was 3.82 percent. Considering those assumptions, a low-income borrower in Los Angeles County could potentially buy a home worth up to $347,000. But only 7.5 percent of homes in Los Angeles County are valued below that threshold, so low-income households in the area are relatively unlikely to be directly impacted by Fannie and Freddie’s affordable housing goals.

In a place like Knox County, Tenn., 80 percent of the metro area’s median income is also roughly $51,000. Under the same assumptions, households with that income could potentially buy a home worth up to $345,000 and their mortgage could still qualify to be purchased eventually by Fannie or Freddie. In Knox County, almost 88 percent of homes are valued under this threshold—and could merit a mortgage that meets Fannie or Freddie’s affordability criteria.

Home prices and incomes vary widely across metros, as illustrated above, and within metros areas. For example, the GSEs’ low-income threshold for the Washington D.C.-Arlington-Alexandria metro area is the same for 20 counties and cities, but home prices vary greatly across that region. In Arlington County, Va., a low-income borrower as defined by the affordability criteria could potentially buy 45 percent of homes. In nearby Frederick County, Md., the same borrower could afford nearly 96 percent of homes.

Nationally, the share of homes affordable under current criteria makes it clear that coastal markets have fewer homes for low-income buyers than rural, heartland markets. The situation is even more pronounced for “very” low-income borrowers.

Rural markets could be most vulnerable to changes in Fannie Mae and Freddie Mac’s affordable housing goals.Zillow

It’s important to note these are maximums for households that are right at the income cutoff. Clearly, low-income households aren’t buying anywhere near that proportion homes in most areas. However, these figures demonstrate how the impact of low-income lending incentives varies across—and even within—regions.

Where Do Fannie and Freddie Buy Now?

Fannie and Freddie’s recent purchase behavior reflects what we found about areas most vulnerable to change —that they are low-cost places, many in the heartland.

In 2016 California, New York, and Hawaii were among the states with the fewest low-income loans purchased by Fannie and Freddie per total mortgages in the state, while Utah, Minnesota, and Idaho topped the list. Although the GSEs purchased the fewest low-income mortgages per borrower from Mississippi and West Virginia, which are low-home-value states, this is more reflective of those states’ low median incomes than their low home values. When controlling for median incomes and the number of total outstanding primary mortgages, higher home values correspond with significantly fewer low-income mortgages purchased by Fannie and Freddie.

The current system tends to meet its affordable housing goals, although the degree to which these goals affect the market and spur new low-income lending is up for debate. In 2016, 22.9 percent of Fannie Mae’s mortgage purchases came from low-income borrowers. That’s shy of its 24 percent benchmark, but Fannie was roughly at the level of the overall market, where 22.87 percent of all mortgages were made to low-income households. Freddie Mac also exceeded the market level in 2016 with 23.8 percent of its loans going to low-income households.

Fannie missed its goal for very low-income borrowers, however, with 5.2 percent of its mortgages coming from very low-income borrowers. That’s below both the 6 percent goal and the 5.4 percent market level.

The question remains, if these benchmarks and goals are eliminated in favor of a fee that was administered separately or another program, would low-income borrowers have a harder time securing mortgages on favorable terms? While that answer is being debated in the halls and chambers of Capitol Hill, what’s clear is that the variation of incomes and home values across the map means changes to the existing system would be felt more in some communities than others.

[i] Requirement is met with mortgages from a.) Census tracts less than 80 percent of AMI or b.) borrowers below AMI and the tract is below median income and the tracts population is at least 30 percent nonwhite.

I’m the Chief Economist at Zillow Group, where I lead economic research teams that are recognized sources of impartial, data-driven analysis on the U.S. housing market. We produce monthly reports on housing trends for more than 450 metro areas, with data often available down...